Chapter 4 Financial Planning and Forecasting

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Chapter 4Financial Planning and Forecasting

• Business 2039 Problem Solutions
• Gitman/Hennessey Text

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Review Question 4 -13Page 159

• The judgmental approach helps to overcome some of
  the weaknesses of the naïve percentage-of-sales
  method of financial forecastingit allows the
  forecaster to change historical ratios based on
  planned managerial action.
• The judgmental is subjective. The more detailed
  approach demonstrated in Figure 4.1 illustrates a
  comprehensive, integrated and systematic approach
  to producing a set of financial projections that
  are integrated with the formal sales, production,
  and financing plan.
• Production of fully integrated plans requires
  considerable communication/interaction across the
  organization, however, it is more likely to
  produce realistic, and achievable financial
  sales, production and financial results.

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Review Question 4 -15Page 159

• The financial manager uses pro forma financial
  statements for a number of purposes including
• Examining prospective financial results of a
  strategic plan to determine whether or not the
  plan needs amendment
• Examining the projected financial results to
  determine what managerial actions may be
  particularly critical in ensuring success (cost
  controls, sales efforts, timing of production
  decisions, etc.)
• Examining prospective financial results to
  pre-arrange financing and to determine the most
  appropriate type of financing, and to determine
  the appropriate timing of that financing.

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Problem 4 -3 Grenoble EnterprisesPage 162
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Problem 4 -3 Grenoble EnterprisesPage 162

• Interpretation
• Despite forecast sales increases in May, June and
  July, projected expenses exceed the projected
  cash receipts in both June and July
• Without additional financing, the firm will be
  technically insolvent in June.
• A number of things can be done to lower the
  amount of financing required including (1)
  eliminating the cash dividend (2) speeding
  collections on sales (3) perhaps slowing
  dispersements (with supplier permissions).
• The results of some of these changes are shown on
  the next slide.

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Problem 4 -3 Grenoble EnterprisesPage 162
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Problem 4 -4 Xenocore, Inc.Page 163
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Problem 4 -4 Xenocore, Inc.Page 163
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Problem 4 -4 Xenocore, Inc.Page 163

• The line of credit is negotiated for the period
  of one year, usually on the basis of a cash
  budget.
• Given the forecast, it appears that the maximum
  financing required will be 42,000
• However, I would want to conduct a full year
  forecast, and then negotiate a line of credit
  that is slightly in excess of the forecast amount
  required (after stress-testing the model cash
  budget)
• In this case a 50,000 line appears to be
  appropriate.

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Problem 4 -8 Metroline ManufacturingPage 165
Cost of Goods Sold remains a constant 65 of sales
Operating expenses remains a constant 65 of sales
Interest Expense stays the same
Dividends increase to 70,000
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Problem 4 -8 Metroline ManufacturingPage 165
Variable portion of Cost of Goods Sold remains a
constant 50 of sales
Variable operating expenses remains a constant 6
of sales
Interest Expense stays the same
Dividends increase to 70,000
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Problem 4 -8 Metroline ManufacturingPage 165
The Two Approaches Compared
The fixed/variable approach fine-tunes the
forecast and produces a more refined result.
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Problem 4 -8 Metroline ManufacturingPage 165

• When the raw percentage of sales approach is
  used, a portion of the costs that are fixed, are
  assumed to be variablethis results in an
  overstatement of the expected expenses.
• The Fixed/Variable approach is likely to provide
  a better estimate of 2003 income, as long as the
  fixed expenses are truly fixed.

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Problem 4 -12 Red Queen RestaurantsPage 168
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Problem 4 -12 Red Queen RestaurantsPage 168
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Problem 4 -12 Red Queen RestaurantsPage 168

• The plug or external financing required occurs
  because asset increases in response to sales
  increases often occur spontaneously.
• On the other hand, only Accounts payable and
  accruals tend to change spontaneously with
  salesthis means that financing must be
  consciously arranged to meet projected needs.